Wednesday, October 31, 2007

Gold as a barometer of liquidity conditions; Governor Mishkin & the L-Word; Some common sense on the "Great Moderation".

[1] Bank Credit Analyst: gold as a barometer of liquidity conditions. "In our opinion, gold is an excellent barometer of liquidity conditions, and the latest move provides confirmation that the market is anticipating further reflation". So says Bank Credit Analyst, the outstanding Canadian consultant. I'm not fully convinced, though. [Bank Credit Analyst: "More Reflation On The Way?"].

[2] Frederic Mishkin & the L-Word. In his recent remarks on the role of the Federal Reserve bank as a liquidity provider, governor Mishkin mentions the L-word no less than ... 30 times! This is, hands down, the new world record. "Moral hazard could also arise when a central bank lends in response to liquidity problems, but I would argue that the risk of that happening might be lower than in the case of lending to troubled institutions. I have in mind situations in which markets become impaired for exogenous reasons. In those circumstances--when financial institutions that are otherwise perfectly solid are at risk of failure because market infrastructures are disrupted or, more generally, when financial instability originates outside the banking sector--an intervention by the Federal Reserve would certainly be beneficial, and the creation of perverse incentives would probably be limited". [Frederic S. Mishkin: "Financial Instability and the Federal Reserve as a Liquidity Provider", Federal Reserve Board].

[3] Great Moderation Watch: finally some common sense [Liquidity @ Financial Times]. William Gamble, president of Emerging Market Strategies, warns about emerging nations' "information deficit". While "excess liquidity" has allowed a "disassociation bewteen perceived and actual risk", the truth is that emerging countries lack "credit reporting, efficient courts, private banks or even free speech, in short accurate and timely information, has so far buried potential issues". Further, "the bankruptcy systems, the plumbing of economics, is either non existent or dysfunctional in all but the most developed economies. If things go south, which in time they always do, putting these economies back together will be a long and difficult process". [William Gamble: "Beware information deficit in emerging nations", Financial Times] [See also Mr. Gamble's blog].